With all of the differences between fixed and variable mortgage rates, it’s easy to get confused about which one to pick for all of your home-buying needs.
5-Year Fixed Mortgage Rate Information
The’ 5′ in a 5-year mortgage rate is the mortgage term and is not to be misunderstood with the amortization period. The term is the duration of time that you lock in the current mortgage rate, whereas the amortization period is the amount of time you will have to pay off your mortgage. The term serves as a reset button on your mortgage, at which point at the end of the term, you need to renew the mortgage at another rate. A standard mortgage, for example, has a 5-year duration term and an amortization period of 25 years.
Whenever the mortgage rate is’ fixed,’ it means the rate (%) is set for the term’s duration, whereas with a variable mortgage rate, the rate has the ability to increase or decrease with the market interest rate, and this is also known as the’ prime rate.’ An example of this is that if the 5-year fixed mortgage rate is at 4%, then throughout the mortgage period you will pay 4% interest.
An interesting detail of the 5-year fixed mortgage rate is that all lenders have to follow their approval standards even if when they choose a lower interest rate mortgage with a shorter term. This benchmark is used not only to reduce the lender’s risk but also to give some room to maneuver to the borrower.
Popularity Of 5-Year Fixed Mortgage Rates
The most common period for a mortgage term is a 5-year mortgage term, which typically makes up around 66% of all mortgages. It sits right in the middle of most accessible lengths of mortgage terms, between 1 and 10 years, and thus represents a risk-neutral average of its popularity.
An analysis of mortgage terms reveals that a further 8% of mortgages have terms exceeding five years, while 26% of mortgages have shorter terms, including 6% of one year or less and 20% with terms varying from one year to less than four years.
Fixed rates are known to be the most prevalent, accounting for 66% of total mortgages. In terms of age dispersion, fixed-rate mortgages for younger age groups are slightly more common, and older age groups are more likely to side with the variable-rate mortgages.
Popularity Of Mortgage Rates By Age Group And Term Length
| TERM Length | Age Group | |||
| 18-34 | 35-54 | 55+ | All Ages | |
| 1 YR | 5% | 7% | 6% | 6% |
| 2-4 YR | 27% | 18% | 12% | 20% |
| 5 YR | 66% | 65% | 69% | 66% |
| 6-10 YR | 3% | 9% | 10% | 7% |
| >10 YR | 0% | 0% | 2% | 1% |
Comparison Of 5-Year Fixed Mortgage Rates
You may think of the difference, or range, between variable mortgage rates and fixed rates as the cost of insurance that will not, more or less, raise mortgage costs over the next five years. The benefit of fixed mortgages is that you understand exactly how much your mortgage payments are going to be, irrespective of whether prices are rising or falling. In essence, you can set everything up and forget it. It relieves the stress of budgeting that can accompany a variable mortgage rate.
If interest rates are low and there is spread that is less severe between shorter-term rates and 5-year fixed mortgage rates, it is typically recommended that you lock in the 5-year rate. The longer-term provides consistency and, since rates are historically low, with a variable rate, the chances of further falling rates are significantly reduced.
On the other hand, typical of all fixed mortgage rates, there is the possibility that you will have to pay higher interest when the variable rates are on the low end, and, analyzed historically, variable rates are proven to be quite a bit less expensive over time.
What Causes Changes In 5-Year Fixed Mortgage Rates?
The 5-year fixed mortgage rate, by and large follows the pattern of 5-year Canada Bond Yields, with the addition of a spread. Economic factors such as unemployment, exports, and inflation influence bond yields.
As Canada Bond Yields increases, it becomes more difficult for mortgage lenders to acquire capital to fund mortgages and their income will be reduced unless they raise mortgage rates. If the market conditions are good, the reverse is true.
With regard to the difference between mortgage rates and bond yields, mortgage lenders set this on the basis of their target market share, competition marketing strategy, and general conditions of the credit market.